Rental Property Deductions – Know What You Can Claim

Over 1.5 million people claimed rental deductions in their tax returns in 2007, with almost 170,000 people claiming deductions for the first time. The Tax Office advises that some common mistakes when claiming rental deductions include:

Claiming deductions for properties not genuinely available for rent;
Incorrectly claiming the full amount of expenses for properties only available for rent for part of the year, such as a holiday home;
Incorrectly claiming the cost of structural improvements such as repairs when they are capital works deductions (like remodelling a bathroom or building a pergola);
Overstating deduction claims for the interest on loans partly taken out to purchase, maintain or renovate a rental property; and partly for private purposes, such to buy a car or go on a holiday. The interest on the private portion of the loan is not tax deductible; and
Incorrectly claiming the full cost of an inspection visit when combined with a private purpose like a holiday. In this case, deduction claims can only be made for the portion of travel directly related to the property inspection. There are two categories of expenses which can be claimed:
Expenses for which you can claim an immediate deduction in the income year in which they were paid, such as council rates, repairs, insurance and loan interest; and
Expenses that are deductible over a number of years like borrowing costs, creating structural improvements and costs of depreciating assets.

Costs associated with acquiring or disposing of a property cannot be claimed but they may form part of the cost base of the property for capital gains tax purposes. Renovation costs and costs to repair damage, defects or deterioration upon purchasing a property cannot be claimed as an immediate deduction.

These are capital expenditure and generally must be claimed as either decline in value deductions over the asset’s effective life, or as capital works deductions over 25 or 40 years.

More information is included in the booklet, Rental Properties 2008, available from the Tax Office after 1 July 2008 by calling 1300 720 092.

Source: Real Estate Institute of Australia - June 2008